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When Can I Discharge a Student Loan in Chapter 7 Bankruptcy?


Chapter 7 bankruptcy is designed to give Iowa debtors a “fresh start” by discharging their legal obligation to repay most of their unsecured debts. Unfortunately, one of the biggest sources of personal debt–student loans–enjoys special protections under federal bankruptcy law. As a general rule, a debtor cannot discharge a student loan unless they can prove to the bankruptcy court that forcing them to repay the debt would impose an “undue hardship.”

Looking at the “Totality of the Circumstances”

But how exactly do you prove an “undue hardship”? In many parts of the country, federal courts use what is called the “Brunner test,” which requires the debtor to prove that repaying their student loans would force them to live below a “minimal standard” of living. Iowa, however, falls within the jurisdiction of the U.S. Eighth Circuit Court of Appeals, which has imposed a different legal test that mandates the bankruptcy court consider the “totality of the circumstances” surrounding the debtor. Basically, this means that Iowa bankruptcy judges must look at three things:

  • the debtor’s past, current, and likely future “financial resources”;
  • the debtor’s “reasonable and necessary” living expenses; and
  • any other fact or circumstance the court deems relevant to a particular case.

Note that the burden of proof is still on the debtor to show why they are entitled to an “undue hardship” discharge of a student loan. This is a high bar to clear. But it is still possible to satisfy the Eighth Circuit’s tests and obtain a student loan discharge.

For example, an Iowa bankruptcy judge recently discharged approximately $230,000 in outstanding student loan debt owed by a 50-year-old woman. The debtor obtained several degrees, including a law degree, in the late 1980s and early 1990s. In 1993, she consolidated her outstanding student loans into a single loan with a balance, at the time, of just under $49,000.

Although the debtor worked for about three years as a lawyer in the 1990s, she has struggled to find work since the 2008 financial crisis. She continued to make student loan payments until approximately 2008, most of which went to interest rather than principal. Currently, the debtor is at-home caring for her two adult children, who have special needs. The debtor’s husband, who earns about $40,000 per year in pre-tax income, supports the family.

Under the “totality of the circumstances,” the judge decided forcing the debtor to repay her remaining student loan debt would impose an “undue hardship.” The judge noted the plaintiff has made an honest effort to find work, but given she is now in her 50s and has “large gaps in employment,” it is “unlikely” she will ever earn enough money “to make any substantial payments on or reduction in her student loan balance.”

The judge also found the plaintiff’s husband did not currently earn enough for the family to meet its “reasonably necessary” expenses for food, which further weighed in favor of an undue hardship discharge. And even though the lender offered to defer future student loan payments until the plaintiff could earn more money, the judge said the “mental and emotional impact on the debtor,” not to mention potentially disastrous tax consequences, also weighed in favor of discharge.

Get Advice from an Iowa Bankruptcy Lawyer Today

It is important to emphasize that the case discussed above is the exception and not the rule. Bankruptcy courts only grant undue hardship discharges of student loan debt in rare circumstances. So if you are faced with mounting student loans and need advice on what to do next, you should contact a Southeast Iowa Chapter 7 bankruptcy attorney right away. Call the Noyes Law Office, P.C. today at 641-472-3236 or 800-875-7148 to schedule a free consultation.


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